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How to Make My ADU a Profitable Investment in Lomita?
To turn your ADU in Lomita into a profitable investment, you need to address the challenge of maximizing its return on investment. Focus on setting the right price by researching local market trends and optimizing the ADU's design to enhance its appeal. Effective marketing can help attract buyers or users, while ensuring compliance with local regulations and considering professional management can further boost your investment’s profitability.
Introduction to ADU Investments in Lomita
Why are ADUs popular in California?
ADUs, also known as granny flats or in-law units, have become a popular choice in California because they help solve some of the state’s housing problems. With home prices going up and fewer homes available, adding an ADU allows homeowners to expand their living space without needing more land. These units can be rented out to generate extra income or used by family members—like young adults or elderly relatives—to keep everyone close.
How can an ADU increase property value?
Adding an ADU can boost your home’s value by providing extra, practical living space that could be rented, used by the family, or even set up as a home office. In California, properties with ADUs are often more appealing to buyers because they offer more options, which can make the home worth more.
Is it possible to sell an ADU in Lomita?
In California, a law called AB 1033 allows local cities to create rules for selling an ADU separately from the main home, similar to how condos are sold, as long as specific requirements are met. In Lomita, selling an ADU separately might be allowed under certain conditions, like if a qualified nonprofit built it, if there's an agreement for shared ownership, or if the city permits the ADU and the main house to be owned separately.
The ROI for building an ADU in Lomita
We analyzed multiple projects, and we determined that on average you should expect a 40% ROI for an ADU project in Lomita. The ROI does not account for the property's acquisition cost. This ROI value is low and it signals a risky investment. Consequently, unless you have personal goals you want to achieve, we consider that an ADU project in Lomita is a risky investment. As a benchmark, a good investment for us is when the ROI is min. 50%+.
Interested to find out the market value of an ADU for your property?
Case study: 900 sq. ft. ADU built in Lomita
Scenario 1: Build to sell
ADU Building Area
The project involves constructing an ADU with a total area of 900 square feet. This ADU is large enough for a 2 bedroom, 1 bath unit. This scenario assumes that you already own this property and there is an existing primary residential unit on site.
Total Project Cost
Based on the industry reports, the construction cost per square foot is $381, resulting in total hard costs of $342,900. Soft costs encompass various expenses incurred during the planning, design, and permitting stages of the project. These include fees for professional services such as land surveying, structural engineering, architectural design, soil engineering, and permit fees. In this case, the soft costs amount to $46,771, covering essential aspects of the project's development and approval process.
The total project cost, including hard and soft costs, is $389,671. This estimate reflects the overall investment required to complete the construction project and obtain the necessary approvals.
Total Added Market Value
The sale price per square foot for a residential house in Lomita is estimated at $600. This represents the anticipated value of the completed building per unit area in the current real estate market.
Multiplying the market value per square foot by the building area yields the total added market value. In this case, the completed project is expected to add $540,00 to the property.
ROI (Return on Investment)
The ROI provides insight into the project's profitability by comparing the total added market value to the total project cost. In this analysis, the potential gross Profit without considering acquisition or financing costs amounts to $150,329 or 40% ROI. At this level, building an ADU to sell it provides a relatively low return compared to both the costs and the market value. In addition to the low return, you’ll have to consider the short capital gain tax, in case you want to sell it before 2 year's end.
Scenario 2: Build to rent
Potential Rental Income of an ADU
Constructing a 900-square-foot ADU in Lomita comes with a total cost of $389,671. Financing with a 6.5% interest rate loan results in a monthly payment of $2,463 or $29,556/year. Ideally, renting out the main house could cover the loan payment, while the ADU provides additional rental income. However, renting out a 2-bedroom, 1-bath ADU long-term in this city could only generate approximately $25,200 annually. At this level of income, the ADU alone would not generate a profit, as its rental income would still fall short of covering its costs.
The city rules state that rentals should last at least 30 days, so short-term rentals are prohibited. While services like Airbnb might bring in more money during busy seasons (for example, $600 for a five-night stay), long-term rentals offer steadier, more predictable income. With long-term rentals, you don't have to worry about finding new tenants all the time, cleaning between guests, or re-listing the property, which leads to more consistent earnings and less maintenance.
Check if the market value of your ADU covers the construction costs.
Is there financial assistance for building ADUs?
Yes, homeowners in California can apply for the CalHFA ADU Grant Program, which provides grants of up to $40,000. This money can be used to cover costs like permits, design, and site evaluations for single-family properties. The program has been around since 2021.
Building Your Team for the ADU Project
Starting an ADU project requires bringing together a reliable team. After securing funding, ensure your property meets all the requirements and check for any size restrictions. If you plan to rent or sell the ADU, working with experienced architects and contractors can help keep the project on schedule. Additionally, collaborating with local professionals who specialize in ADUs can make the process easier and more efficient.
What are some other financing options for building an ADU?
- Home Equity Line of Credit (HELOC): Borrow money when needed by using the value of your home as collateral.
- Home Equity Loan: Get a lump sum loan upfront, then pay it back over time with interest.
- Cash-Out Refinancing: Adjust your mortgage to get extra money.
- Renovation Loans: Loans designed to help with the costs of building or renovating.
- Private Lenders: These lenders may offer more flexible repayment terms than traditional banks.
Potential Challenges and Solutions
Can an HOA prevent the construction of an ADU?
No, homeowners associations cannot block your ADU construction. State laws like AB 670 and AB 3182 protect your right to build an ADU. If an HOA tries to prevent it, it could face legal consequences.
Maximizing Profitability in Lomita
Marketing Strategies to Increase ADU Investment Returns
To maximize your ADU's investment potential, try these strategies:
- Work with local real estate agents to create eye-catching property listings.
- Offer virtual tours so potential renters or buyers can easily view the space online.
- Use social media like Instagram and Facebook to reach a wider audience and attract more interest.
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